The Board
of Governors of the Federal Reserve System has requested
comment on a proposal for the Federal Reserve Banks
to stop providing services to depository institutions
for the collection of definitive municipal securities
at the end of 2005. The proposal to exit this service
is prompted by the declining volume of definitive
municipal securities, the Reserve Banks’ expected
underrecovery of costs for providing the service in
future years, and the availability of reasonable private-sector
alternatives.

The Reserve Banks’ noncash collection service
involves the collection and processing of definitive
municipal bonds and coupons issued by state and local
governments. Definitive municipal securities are registered
or bearer bonds that have been issued with interest
coupons in certificated, or physical, form. The volume
of these securities has declined over the years as
a result of legal and market changes. Over the past
five years, volume has decreased by an average of
20 percent annually and is expected to decline by
one-third in 2005. The declining volume has reduced
service revenue for the Reserve Banks. However, service
costs remain largely fixed due to the strict custody
control requirements for handling physical securities.
Although the Reserve Banks have recovered the costs
of their noncash collection service over the long
run, they project a significant underrecovery of costs
beginning in 2005 even if the fees they charge depository
institutions are increased.

If the Reserve Banks withdraw from the service, depository
institution customers would have several reasonable,
private-sector options available for the processing
of definitive municipal securities such as the Depository
Trust Company, correspondent banks, or direct presentment
to the paying agents. Collectively, these alternatives
would be expected to provide an adequate level of
service nationwide.

The Federal Register notice, published October 19,
2004, is available here(34 KB, 7 pages).